Moody's Investors Service on Tuesday downgraded Nordstrom's senior unsecured rating and issuer rating, both to Baa2, reflecting credit metrics outside the agency's target "while excess cash has been allocated to share repurchases," Moody's Vice President Christina Boni said in a client note emailed to Retail Dive.
But the ratings firm also moved its outlook on the department store from negative to stable, noting "the company's significant investments in technology and accelerated capital projects" that should help operating results long term, and reflecting Moody's expectation that its "financial policy will remain balanced and as the company works to stabilize operating performance."
Also on Wednesday, UBS downgraded its rating for Nordstrom's stock, to "sell" from "neutral." UBS analyst Jay Sole anticipates a rough holiday, further disruption from tariffs and e-commerce, and a consumer not particularly drawn to the department store's high-touch service strategy, according to a client note emailed to Retail Dive. The equity analyst set a target price of $30 for the retailer's stock; shares currently trade at more than $35.
Wednesday's UBS note wasn't the first gloomy assessment of Nordstrom from those analysts. In July, Sole's team deemed the department store a "no-growth retailer" in light of drastically changing consumer spending on apparel.
Moody's on Tuesday similarly noted the company's "focus on fashion apparel and the secular change challenges that face the department store industry," along with trends affecting "purchasing patterns." The firm also cited "the company's concentration in California" as a limitation, although that changed, at least somewhat, last week with the opening of its first full-line store in New York City.
While outside forces are taking their toll on Nordstrom, both Moody's and UBS also noted the effects of the company's own strategy in their assessments. Taken together, it's a mixed bag. For Moody's, the weakness is mostly financial and mostly in the short term, with the longer term outlook seen as benefiting from the steps Nordstrom is taking.
"The company has made significant investments over the past five years to position to itself to provide superior service at all customer contacts points whether in-store, online or through mobile. Its full line department store segment remains uniquely positioned as an assessable luxury retailer," Boni wrote. "Over one-third of Nordstrom's sales are from its off-price segment which mitigates the company's business risk from department stores as the space is expected to relatively outperform. The company also leads the off-price channel in e-commerce penetration with sales of approximately $1 billion."
But UBS doesn't see so much sunshine in the long view. Analysts noted that retail margins in North America in the second quarter had declined to 6.8% from 9.5% in 2011, something they said would only continue thanks to rising e-commerce fulfillment costs and falling store footfall. And for Nordstrom, they contend, "this is an especially acute problem."
UBS analysts warned that labor costs could rise, citing evidence that Nordstrom employee satisfaction with their compensation "has dropped, implying the company may need to raise wages to avoid big turnover."
Yet the department store isn't likely to be able to battle rising costs and declining margins with premium goods or services, UBS also suggested, saying that its research has found that Nordstrom's "prices are too high" and that its "effort to differentiate on service may fall flat since the consumer is very focused on value."
On Tuesday, Nordstrom's board and co-Presidents Erik and Pete Nordstrom notified the Securities and Exchange Commission that the brothers and their family were no longer pursuing a bid for a controlling stake in the company. UBS noted that — along with a better-than-expected profit contribution from holiday sales at the new Manhattan flagship and a swifter-than-expected success story from its Local strategy — another attempt by the family to take the retailer private could lead them to a more positive view of its earnings potential.
In New York last week Nordstrom executives mentioned that they are accelerating their merchandise-free Local strategy with new stores in its top 10 markets next year, starting with Chicago, San Francisco and Dallas ahead of the holidays this year.